Chapter 02 Financial Services: Depository Institutions True / False Questions In recent years, the number of commercial banks in the U.S has been increasing True Most of the change in the number of commercial banks since 1990 has been due to bank failures True False Commercial banks have had limited power to underwrite corporate securities since 1987 True False False Large money center banks finance most of their activities by using retail consumer deposits as the primary source of funds True False Currently, federal standards not allow investment banks to covert to a bank holding company structure True False 2-1 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Prior to the financial crisis of 2008, the return on equity for small community banks had been larger than for large money center banks True False In terms of total assets, commercial banks with under $1 billion in assets have become a larger segment of the industry in recent years True False Money center banks rely more heavily on wholesale and borrowed funds as sources of liability funding than community banks True False Large banks tend to make business decisions based on personal knowledge of customers creditworthiness and business conditions in the local communities True False 10 All banks with assets greater than $10 billion are considered money center banks True False 11 Since 1990, commercial banks decreased the proportion of business loans and increased the proportion of mortgages in their portfolios True False 2-2 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 12 The growth of the commercial paper market has led to a decline in the demand for business loans from commercial banks True False 13 The securitization of mortgages involves the pooling of mortgage loans for sale in the financial markets True False 14 By converting to a bank holding company, an investment bank gains access to Federal Reserve lending facilities True False 15 Large money center banks are often primary dealers in the U.S Treasury markets True False 16 Because of the large amount of equity on a typical commercial bank balance sheet, credit risk is not a significant risk to bank managers True False 17 Lehman Brothers failed during the recent financial crisis despite having access to the low cost sources of funds offered by the Federal Reserve True False 2-3 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 18 A major difference between banks and other nonfinancial firms is the low amount of leverage in commercial banks True False 19 Money market mutual funds have attracted large amounts of retail savings and retail time deposits from commercial banks in recent years True False 20 Retail nontransaction savings and time deposits comprise the largest portion of deposits for commercial banks True False 21 Negotiable certificates of deposits are differentiated from fixed time deposits by their negotiability and active trading in the secondary markets True False 22 The maturity structure of the assets of commercial banks tends to be shorter than the maturity structure of liabilities True False 23 The growth in off-balance-sheet activities during the decade of the 1990s was due, in large part, to the use of derivative contracts True False 2-4 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 24 The movement of an off-balance-sheet asset or liability to an on-balance-sheet item is dependent on the occurrence of a contingent event True False 25 The use of off-balance-sheet activities allows banks to practice regulatory tax-avoidance True False 26 The use of off-balance-sheet activities and instruments will always reduce the risk to a bank True False 27 Although growing, the notional value of bank OBS activities remained less than the value of onbalance-sheet activities at the end of 2012 True False 28 Commercial banks in the U.S often are subject to several of the four regulatory agencies True False 29 The dual banking system in the U.S refers to the operation and establishment of large regional as well as small community banks True False 30 As of December 2012, the number of nationally chartered banks was greater than the number of state chartered banks True False 2-5 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 31 All commercial banks must be members of the Federal Reserve System True False 32 Small banks make proportionately larger amounts of real estate loans than large banks True False 33 The Federal Reserve System has regulatory supervision over all holding company banks whether they include national- or state-chartered banks True False 34 The primary objective of the 1927 McFadden Act was to restrict interstate bank branching True False 35 The primary objective of the 1933 Glass-Steagall Act was to prevent commercial banks from competing directly with commercial insurance companies True False 36 The DIDMCA of 1980 and the DIA of 1982 were the initial acts to begin the deregulation of the commercial banking industry True False 37 The Riegle-Neal Act of 1994 removed many of the restriction on interstate banking that were originally imposed by the 1933 Glass Steagall Act True False 2-6 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 38 The Financial Services Modernization Act of 1999 allows commercial banking activities and securities underwriting to operate simultaneously under the same ownership structure True False 39 Savings banks and savings associations are savings institutions; with savings banks serving as the primary providers of residential mortgage loans, and savings associations concentrating on commercial loans and corporate bonds as well as mortgage assets True False 40 In general, the banking industry performed at higher levels of profitability in the decade of the 1990s than the decade of the 1980s True False 41 Commercial banks that have invested in Internet and mobile banking services and products have significantly outperformed those banks that have chosen to avoid these markets True False 42 Regulator forbearance is a policy of allowing economically insolvent FIs to continue in operation True False 43 The primary reason for the decline of the S&L industry was the passage of legislation that gave commercial lending powers to the S&L industry True False 2-7 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 44 Savings associations and savings banks both are insured by insurance funds that are managed by the FDIC True False 45 The savings association industry continues to be the primary lender of residential mortgages True False 46 As a percent of total assets, savings institutions hold lower amounts of cash and U.S Treasury securities than commercial banks True False 47 The number of savings associations has been declining since 1990 True False 48 Savings associations and savings banks are chartered and regulated by the Federal Reserve Bank True False 49 Savings institutions enjoyed record profitability during the late 1990s and early 2000s True False 50 Credit unions operate on a common bond principle which emphasizes the depository and lending needs of credit union members True False 2-8 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 51 The credit union industry avoided much of the financial distress of the 1980s because of the short maturity and relatively lower credit risk of their assets True False 52 The primary objective of the Reigle-Neal Act (1994) was to ease branching across state lines by banks True False 53 As with other DIs, profits or return on assets (ROA) is the primary goal of credit union management True False 54 A significant disadvantage for credit unions in competing with commercial banks is the severe restriction in the variety of products and services that they can offer True False 55 A significant advantage for credit unions in competing with commercial banks is the tax-exempt status that has been granted to credit unions True False 56 According to the American Bankers Association, the tax-exempt status of credit unions is the equivalent of a $1 billion per-year subsidy to the industry True False 2-9 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 57 Compared to the average commercial bank, credit unions tend to have higher overhead expenses per dollar of assets True False 58 All credit unions are nationally chartered and regulated by the National Credit Union Administration True False Multiple Choice Questions 59 Which of the following FIs does not currently provide a payment function for their customers? A Depository institutions B Insurance companies C Finance companies D Pension funds E Mutual funds 60 A consumer lending function is performed by each of the following FIs EXCEPT A mutual funds B finance companies C pension funds D depository institutions E insurance companies 2-10 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 70 Traditionally, the percentage of depository institutions' assets funded by some form of liability is approximately A 50 percent B 75 percent C 85 percent D 90 percent E 40 percent 71 National-chartered commercial banks are most likely to be regulated by A the FDIC only B the FDIC and the Federal Reserve System C the Federal Reserve System only D the FDIC, the Federal Reserve System, and the Comptroller of the Currency E the Federal Reserve System and the Comptroller of the Currency 72 State-chartered commercial banks may be regulated by A the FDIC only B the FDIC and the Federal Reserve System C the Federal Reserve System only D the FDIC, the Federal Reserve System, and the Comptroller of the Currency E the FDIC, the Federal Reserve System, the Comptroller of the Currency, and state banking commissions 2-44 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 73 The strong performance of commercial banks during the decade before 2007 was due to A the stability of interest rates during this period B the ability of banks to shift credit risk from their balance sheets to financial markets C the contraction of the number of banks and thrifts D the growth in the number of thrifts and credit unions E All of the above 74 Money center banks are considered to be any bank which A has corporate headquarters in either New York City, Chicago, San Francisco, Atlanta, Dallas, or Charlotte B is a net supplier of funds on the interbank market C relies almost entirely on nondeposit and borrowed funds as sources of liabilities D does not participate in foreign currency markets E is not characterized by any of the above 75 A large number of the savings institution failures during the in the 1980s was a result of A interest rate risk exposure B excessively risky investments C fraudulent behavior on the part of managers D All of the above E answers B and C only 2-45 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 76 One of the primary reasons that investment banks were allowed to convert to bank holding companies during the recent financial crisis was recognition that A their operating activities were too risky and they needed the cushion of bank deposits to alleviate funding risks B the industry had acquired too much capital during the previous decade C bank holding companies needed the ability to underwrite new issues of corporate securities D it was the only way an investment bank could qualify for federal bailout funds E the Federal Reserve was unable to purchase troubled assets from investment banks, but they could from bank holding companies 77 Regulatory forbearance refers to a policy of A allowing insolvent banks to continue to operate B foreclosing real estate properties in the event on non-payments of mortgages C strict regulation of banks, closing them down as soon as they are insolvent D rescheduling of all loans of a client in the event of non-payment E Answers B and C only 78 The FIRREA Act of 1989 introduced the qualified thrift lender test (QLT), which set the percentage of assets required for qualification to be no less than A 50 percent B 55 percent C 60 percent D 65 percent E 68 percent 2-46 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 79 A primary advantage for a depository institution of belonging to the Federal Reserve System is A direct access to correspondent banking services B the lower deposit reserves required under the Federal Reserve System C direct access to the discount window of the Fed D commission less trading of U.S government securities E decreased costs of regulatory compliance 80 Customer deposits are classified on a DI's balance sheet as A assets, because the DI uses deposit funds to earn profits B liabilities, because the DI uses deposits as a source of funds C assets, because customers view deposits as assets D liabilities, because the DI must meet reserve requirements on customer deposits E liabilities, because DIs are required to serve depositors 81 Holdings of U.S Treasury securities are classified on a DI's balance sheet as A assets, because U.S Treasury securities are default risk-free B liabilities, because the DI must pay cash in order to acquire the securities C assets, because securities holdings represent a use of funds for investment D liabilities, because the Treasury securities must be pledged as collateral against discount window borrowing E assets, because the market for U.S Treasury securities is the most liquid in the world 2-47 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 82 Customer loans are classified on a DI's balance sheet as A assets, because the DI's major asset is its client base B liabilities, because the customer may default on the loan C assets, because the DI earns servicing fees on the loan D liabilities, because the DI must transfer funds to the borrower at the initiation of the loan E assets, because DIs originate and monitor loan portfolios 83 This broad class of loans constitutes the highest percentage of total assets for all U.S commercial banks as of the end of 2012 A Commercial and industrial B Commercial and residential real estate C Individual loans D Credit card debt E Less developed country loans 84 Which of the following dominates the loan portfolios of banks with assets less than one billion dollars? A Commercial loans B Consumer loans C Real estate loans D Credit card debt E Industrial loans 2-48 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 85 Which of the following is true of off-balance-sheet activities? A They involve generation of fees without exposure to any risk B They include contingent activities recorded in the current balance sheet C They invite regulatory costs and additional "taxes." D They have both risk-reducing as well as risk-increasing attributes E The risk involved is best represented by notional or face value 86 Which of the following observations concerning trust departments is true? A They are found only among smaller community banks B Only the largest banks have sufficient staff to offer trust services C They provide banking services to other banks D Pension fund assets are the largest category of assets managed by trust departments E They primarily handle assets for financially sophisticated investors 87 Which of the following identifies the primary function of the Office of the Comptroller of the Currency? A Manage the deposit insurance fund and carry out bank examinations B Regulate and examine bank holding companies as well as individual commercial banks C Charter national banks and approve their merger activity D Determine permissible activities for state chartered banks E Stand as the "lender of last resort" for troubled banks 2-49 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 88 Which of the following currently manages the insurance funds for both commercial banks and savings institutions? A FDIC B FSLIC C OCC D FRS E State authorities 89 What was the primary objective of the Bank Holding Company Act of 1956? A Permitted bank holding companies to acquire banks in other states B Restricted the banking and nonbanking acquisition activities of multibank holding companies C Regulated foreign bank branches and agencies in the United States D Bank holding companies were permitted to convert out-of-state subsidiary banks into branches of a single interstate bank E Allowed for the creation of a financial services holding company 90 These organizations were originated to avoid the legal definition of a bank A Money center banks B Savings associations C Nonbank banks D Financial services holding companies E Savings banks 2-50 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 91 The qualified thrift lender test is designed to ensure that A a floor is set for the mortgage related assets held by savings institutions B a ceiling is set on the mortgage related assets held by commercial banks C savings associations are covered by risk-based deposit insurance premiums D an interest rate ceiling is imposed on small savings and time deposits at savings institutions E regulators could close thrifts and banks faster 92 Which of the following is the most important source of funds for savings institutions? A Borrowings from the Federal Home Loan Bank B Small time and savings deposits C Repurchase agreements D Direct federal fund borrowings E Negotiable certificates of deposit 93 The primary regulators of savings institutions are A the Federal Reserve and the FDIC B the Office of Thrift Supervision and the FDIC C the FDIC and the Office of the Comptroller of the Currency D the Office of Thrift Supervision and the Comptroller of the Currency E the Federal Reserve and the Comptroller of the Currency 2-51 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 94 The largest asset class on credit unions' balance sheet as of September 30, 2012 was A cash B investment securities C home mortgages D checkable deposits E consumer credit 95 The largest liability on credit unions' balance sheet as of September 30, 2012 was A small time and savings deposits B open-market paper C repurchase agreements D ownership shares E share advances 96 Credit Unions were generally less affected than other depository institutions by the recent financial crisis because A they had relatively more assets in consumer loans than other DIs B they had relatively more residential mortgages C they hold more government and agency securities, on average D they hold less government and agency securities, on average E Answers A and C only 2-52 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 97 The most numerous of the institutions that define the depository institutions segment of the FI industry in the US is (are) A savings associations B small commercial banks C large commercial banks D savings banks E credit unions 98 Which of the following observations concerning credit unions is NOT true? A They invest heavily in corporate securities B Member loans constitute a majority of their total assets C They tend to invest more of their assets in U.S Treasuries than other DIs D They engage in off-balance-sheet activities E They focus more on providing services and less on profitability 99 Compared to banks and savings institutions, credit unions are able to pay a higher rate on the deposits of members because A they intend to attract new members B they not issue common stock C of their tax-exempt status D Regulation Q still applies to the industry E they are subject to the provisions of the Community Reinvestment Act 2-53 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 100 Which of the following is NOT an off balance sheet activity for U.S banks? A Derivative contracts B Loan commitments C Standby letters of credit D Trust services E When-issued securities 101 Correspondent banking may involve A providing banking services to other banks facing shortage of staff B providing foreign exchange trading services to individuals C holding and managing assets for individuals or corporations D acting as transfer and disbursement agents for pension funds E providing hedging services to corporations 102 What is the defining characteristic of the dual banking system? A Coexistence of parent and holding companies B Coexistence of both nationally chartered and state chartered banks C Control of nationally chartered and state chartered banks by the state regulators D Control of nationally chartered banks by both FRS and State bank regulators E Nonbanking companies carrying out both banking and other activities Short Answer Questions 2-54 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education Choose among the following major banking laws A The McFadden Act of 1927 B The Glass-Steagall Act of 1933 C The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980 D The Garn-St Germain Depository Institutions Act of 1982 E The Competitive Equality in Banking Act of 1987 F The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 G The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 H The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 I Financial Services Modernization Act of 1999 103 This legislation sought to limit the growth of non-bank banks E 104 This legislation introduced prompt corrective action requiring mandatory intervention by regulators when a bank's capital falls below certain levels G 105 This legislation introduced money market deposit accounts D 2-55 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 106 This legislation permits bank holding companies to acquire banks in other states H 107 This legislation limited interstate branching A 108 Eliminated restrictions on banks, insurance companies, and securities firms from entering into each other's areas of business I 109 This legislation separated commercial and investment banking B 110 This legislation phased out Regulation Q ceilings on deposit interest rates C 2-56 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 111 This law allows bank holding companies to convert out-of-state subsidiary banks into branches of a single interstate bank H 112 Provided for state regulation of insurance I 113 This legislation replaced FSLIC with FDIC-SAIF F 114 This legislation limited thrift investments in non-residential real estate F 115 This legislation introduced risk based deposit insurance premiums G 2-57 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 116 This legislation limited the use of "too big to fail" bailouts G 117 This legislation streamlined bank holding company supervision, with the Federal Reserve as the umbrella holding company supervisor I 2-58 Copyright © 2014 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education ... a financial services holding company 90 These organizations were originated to avoid the legal definition of a bank A Money center banks B Savings associations C Nonbank banks D Financial services... False 32 Small banks make proportionately larger amounts of real estate loans than large banks True False 33 The Federal Reserve System has regulatory supervision over all holding company banks... primary dealers in the U.S Treasury markets True False 16 Because of the large amount of equity on a typical commercial bank balance sheet, credit risk is not a significant risk to bank managers